Discharging student loans in bankruptcy is one of the most complicated subjects and legal areas in American Jurisprudence. Research of the issue shows us that the current problems with student loan discharges in bankruptcy has been due to mass incompetence by Congress, the Judiciary Committees, the Education Committees, and especially federal bankruptcy courts—they have all put their own problem-stamp on the issue to help destroy “good intentions” by Congress and justice for student debtors.
Congress started off well meaning when it established the 1978 Bankruptcy Reforms. The law of that era, sadly, has been morphed into what can only be described as the antithesis of the original Congressional intent and law to become what now amounts to one of the most diabolical injustice systems in U.S. history.
The 2-part, interdependent, student debt law with respect to bankruptcy discharges was created in accordance with Congressional testimony from the period of 1971 through the adoption of the law in 1978. Congress had two clear intents: 1) prevent “gaming of the system” by unscrupulous students seeking a free education by filing bankruptcy immediately after graduation, and 2) ensure that all honest students in need of bankruptcy protection and “fresh start relief” could get relief, including relief of debt on all student loans—to ensure that the bankruptcy purpose and principle of “fresh start relief” was not injured or undermined. It was a simple and noble concept that later congressional research reports lauded as being 100% successful in preventing gaming yet ensuring student debtor protections.
Part “A” of the law simply prohibited students from getting student debt discharges for the first 5-years, post graduation. This was the aspect of the law designed to help prevent “gaming of the system”.
Part “B” of the 2-part law was equally simple. Any student who had a genuine need for bankruptcy relief during the 5-year prohibition period (but not someone “gaming the system”) would have equal protection ensuring they could get fresh start relief”. The law granted what Congress coined as an “escape clause” to the 5-year prohibition known as the “undue hardship” exception rule.
Congressional testimony records make it clear that “undue hardship” was defined as nothing more than a student debtor having a legitimate need for bankruptcy relief within the 5-year prohibition period. However, the courts have never understood this reality and have thus relied on all sorts of incompetent research and decision making in order to create their own definition of “undue hardship” which is used today.
The records show that Congress wanted the courts to quit “rubber stamping” student bankruptcies with an automatic discharge and thus examine the merits of student debtor cases to ensure against “gaming” fraud—fraud having been an issue that Congress had combated since the inception of the original 1898 Bankruptcy Act. In other words, so long as the court reviewed the merits and found that the student genuinely needed bankruptcy relief, then a discharge of all debts, including student loan debts, was to be granted—even inside the prohibitive 5-year time frame set forth under Part “A”. Thus the principles of “fresh start relief” were to be adequately safeguarded and the Bankruptcy Act’s purpose protected as well.
The 2-part, interdependent law worked beautifully for its brief history. Then, in 1990, amendments changed the Part “A” aspect of the law from a 5-year to 7-year waiting period post graduation. The reason for the change was simple. Students could get all sorts of forbearances and thus use up the entire 5-year waiting period without ever making a single student loan payment. Therefore, students could still “game the system” by filing for bankruptcy relief even when it was not genuinely needed.
Congressional studies since that period have revealed no evidence that such new forms of “gaming” were taking place, thus changes in the Part “A” aspect of the law have long been considered unfounded. [Note: To solve the problem, Congress could have simply dictated student loan policies that banned students from getting forebearances 2.5 years post graduation, except in “financial hardship” cases, which would have been far easier than disturbing the bankruptcy laws.]
Problems with the 2-part law had been brewing in the court system since it had been established in 1978. The courts simply refused to research Congressional testimony with respect to the intended meaning of “undue hardship” and instead relied on a 1971 pre-bankruptcy reform proposal that was used to start the debates (a report that was not written by Congress). Had the courts did a competent job, they would have learned that Congress clearly defined “undue hardship” as an “escape clause” over the many years leading up to the 1978 Bankruptcy Reform and law. Instead, the courts choose to apply a harsher interpretation stance that gave new meaning to the concept of “undue hardship” as “something much more than a need for bankruptcy”, never fully appreciating or caring that they were creating “bench law” along the way (a violation of the 1st Amendment).
Trouble skyrocketed after Congress made changes to it that dramatically compounded the problems with the court interpretation of the law in 1998. The 2-part law was severed in half, removing the Part “A” or 7-year mandatory prohibition period and leaving only the Part “B”, the “undue hardship” portion of the law. This helped confound the courts even more (like any half-law would).
From 1978 until 1998, any student who fulfilled Part “A’s” waiting requirement and who had a need for bankruptcy could have ALL of their student loans discharged. The new bankruptcy law of 1998 essentially discriminated the bankruptcy laws against student debtors–illegally prohibiting students from getting “fresh start relief” while other US citizens with consumer debts could get such relief. The law violated the very foundation of America’s Constitutional system that demanded equal rights for all.
The 1998 law also violated individual debtor rights (1st, 5th and 14th Amendment Rights) as well as loan contract laws. The new law imposed mass injustice by unilaterally removing a key “implied contract” that attached to all student loan debts at the time of debt inception (not promissory note creation).
Students, knowingly or unknowingly, assumed an “implied contract” when they first took on federally guaranteed student loan debt. That “implied contract” automatically attached to the debt (not their promissory note or loan contract due to the unique nature of student loan guarantees that can override basic contract legal principles and protections). At the initial moment the student assumed student loan debt, they also assumed the terms and conditions of all federal laws in place at the time that related to the use and even bankruptcy aspects of such debts.
The implied contract is not altered at the time of any subsequent consolidation student loan because the student has already assumed the debt burden, hence the implied contract conditions of such debt that were in place when the debt was first incurred are what must count. The student debtor, during loan consolidation, is powerless to repay the loan or satisfy the debt (in virtually all cases), thus has no alternative but to assume a consolidated note that likely does not have the same federal laws in place as when the debt was first incurred. However, public policy institutes and promotes students to consolidate their student loans to help lower payments and thus better ensure the integrity of the student loan guarantee system. It is a regiment designed to reduce student loan default rates (as well as help students).
However, the implied contract supersedes the loan consolidation and remains attached to the student loan debt at the time of inception because the student debtor is powerless to change the debt owed. During the initial taking on of student loan debt, the student was free to examine all the circumstances surrounding such debt then to simply walk away from taking on the debt if the terms were too objectionable. The consolidating loan student does not have the same power–the debt already exists and once it is consolidated, s/he cannot consolidate again (unless she takes on more debt), thus try to reset the terms of the “implied contract” that might have evolved in the interim since the initial debt was incurred.
To bring this aspect to relevancy here, let’s recap: All debtors who took out student loans up until 1998 bankruptcy reform changes were enacted did so under the “implied contract” that their debt was 100% dischargeable in bankruptcy so long as they complied with the mandatory waiting period (5-years or 7-years). Post 1998 reform, student debtors were not legally entitled to “fresh start relief” because “Part A” of the relevant bankruptcy law was gone (and Congress said no new bankruptcies from that time forward would be honored with respect to any previous “implied contracts”–i.e. people who were legally entitled to discharge would now be denied their Rights by Imperial decree). Also, the bankruptcy courts had, by now, well established their own law with respect to the legal meaning of “undue hardship”, which essentially denies all student debtors “fresh start relief” (less than 5% will ever get it once the appeal process is completed—which shows a clear pattern of discrimination with respect to student debtors and other consumer debt bankrupts).
Undue Hardship and the Brunner Test
Today, the most widely used “undue hardship” standard imposed by the court is what is known as the Brunner Test, which arises from a 2nd Circuit Court decision that has been adopted by other federal circuits.
Today, rather than “undue hardship” simply meaning a “legitimate bankruptcy” as intended by the 1978 Bankruptcy Reforms (a fact made crystal clear by Congressional testimony records from 1971 to 1978), it has become a far more sinister legal meaning designed specifically to keep all student debtors in a full life of permanent debt servitude.
Today, courts like the 2nd and 9th Circuit Court apply their own standard of “undue hardship” interpretation that has made it one of the most difficult laws in the world to navigate and judge competently. Current studies show that virtually all “undue hardship” court decisions boil down to a single judge’s whimsical opinion—that there is no systematic and consistent interpretation of the law taking place across the country when it comes to the fabricate “bench law” standard. The Draconian law now ensures that virtually 95% of all student debtors will never have fair and reasonable access to “fresh start relief” in bankruptcy.
Student debtors seeking fresh start in bankruptcy will face near insurmountable hurdles established by Congress and the Bankruptcy Courts that have boldly violated their 1st, 5th, 13th, and 14th Amendment Rights. Student debtors no longer have “equal protection” to those of other consumer debt holders—they are, by law, a lower grade of citizen that are to be fully discriminated against. The student debtor seeking an “undue hardship” discharge in bankruptcy has this to look forward to:
- In most cases, the student debtor will need to pay a qualified attorney more money than the student loan amount seeking to be discharged.
- In most cases, the student debtor will be unable to secure qualified legal counsel due to a lack of finances or an inability to find such qualified and willing counsel—thus will have to proceed in court as self represented (Pro Se).
- The average student debtor cost for hiring an “undue hardship” lawyer can be over $15,000 while the average cost of the more typical consumer bankruptcy lawyer (used by 99% of all individual debtors) is often less than $1,500—a massive cost discrimination standard. Worse, student debtors are not typically allowed to recover legal costs when they win their cases—but banks or loan holders typically get their attorneys fees and court costs paid by the student debtor that loses the case—a mass discrimination reality that encourages banks and loan companies to fight!
- The student debtor will not have clear Jury Instructions that outline the elements of establishing their burden of proof for the court—thus they will have to “wing it” and hope for the best.
- The judge will, in most cases, be unsympathetic to the debtor and will generally side with their sister federal branch, the Dept of Education or its appointed surrogate guarantors.
- The judge, in most cases, will treat the Pro Se with far more discourtesy and disrespect than the adversary who is represented by expert legal counsel.
- The court will typically only grant student loan discharges in 30% to 50% of all cases that come before it.
- In cases where the student is lucky enough to win, the loan guarantor will file for an Appeal in nearly all cases—the vast majority will end with the student ultimately losing.
- Over 95% of all student debtors who should be fully and legally entitled to equal treatment under the laws of the United States will be denied “fresh start relief” by the bankruptcy courts (in many cases, the courts will cite false information, such as they must protect the student loan guarantee system—even though student loan bankruptcies from 1978 to 1998 are documented to have never once threaten the student loan guarantee system–in fact, the system grew by leaps and bounds and put out immense profits in that period).
- Whether successful or not in obtaining “undue hardship” debt relief from the bankruptcy court, the student debtor will be further discriminated against (in comparison to other consumer debtors) because every detail of their life, including their most guarded medical records, will be revealed to the public court record (accessible to the world). This reality all but ensures that a student debtor who later applies for a job or rental property or most things will be denied employment or such once a background check is done on them—once the prospective employer or landlord learns all about their personal student loan hardship and life and all its embarrassing medical details and other aspects, etc. (It is current Congressional and US Policy, as demonstrated by law and actions, that the student debtor is to be discriminated against for life and to be treated like a pariah of society for the remainder of their life—that they are, in fact, to become lifetime, indenture servants of the federal government).
In conjunction with the Draconian “undue hardship” standard, a variety of other laws—including those that have established the Income Based Repayment and Income Contingency Repayment and similar student debt programs (that require a mandatory 25-year repayment period), are now essentially placing student debtors into a “lifetime debt servitude” situation that is effectively indenturing their individual labor to the federal government for their life. Essentially, this is a new form of federal government as the Black Slave Era “company store”–except today, the federal government is now master. It is a clear violation of the 13th Amendment—a reality no court wishes to entertain and that no member of Congress or the White House wants to abate (or that no mainstream student advocacy will legally challenge–or that no journalist of substance understands or is willing to report on).
Learn The Facts
- While many courts have used the excuse that Congress made the undue hardship law in order to protect the student loan program, the facts show that the program grew times larger and more successful during the period when all student loans were 100% dischargeable in bankruptcy. Therefore, the program has never been threatened by student loan discharge-ability.
- The US Constitution prohibits treating the same class of persons differently. Student debtors are consumer debtor just like other consumer debtors, such as those who owe debt for homes, cars, credit cards, and even gambling losses. The government has the option of not offering any student loan programs but not the option of prohibiting students from equal access to “fresh start relief”.
- Over 99% of all student loan monies lost due to hardship or bankrupt debtors then recovered in part or full by debt collectors never goes to the US Treasury but instead goes into the pockets of banks and debt collectors. In other words, preventing the discharge of student loans in bankruptcy does not significantly alter the impact on the US Treasury or the student loan programs—the losses are being sustained anyway. In fact, the federal government loses money because it keeps “bad loans” alive fr longer that it should and the costs it must ultimately repay to debt collectors and bankers can be double or triple the amounts that could have been quickly discharged in bankruptcy instead.
- The vast majority of the problems with the student loan program have to do with greedy educators who refuse to cut administrations and their respective super-overhead costs in order to significantly lower tuition, thus the need for students to borrow in the first place. Today, student loans are nearly 5-times larger than they were in 1978.
- No student or parent should ever take out or co-sign a loan that is used for college or higher education—not ever! Students should use a pay-as-you-go college plan that does not involve student debt and the federal laws the surround such debt. The risk is simply too high that the student debtor will eventually become an “indentured servant” to the federal government or have their life ruined by one of many of the laws and legal systems in place and designed to punish them for taking a chance and doing the right thing. In our well studied opinion, student loans are 50 times worse than loans from a Mafia loan shark—nobody should consider using one!
- The Congress should remove 11 Title 523(a)(8) and make all student loans 100% dischargeable.
- Or, alternatively, Congress should re-install the 1978 bankruptcy reform law version and clarify the meaning of “undue hardship” to mean a “legitimate need for bankruptcy” as defined and demonstrated under the current screening process of the 2005 Bankruptcy Reform standards used for all consumer debtors—and it should remove the use of forbearance after 32-months post graduation so that there is no undermining of the 5-year exception rule. No student should be harmed or prejudice by virtue of the fact they did the right thing–everyone is equally entitled to fresh start relief if and when it is needed.
- Congress should prohibit all student debt repayment terms from extending more than 12-years post graduation. This will help limit the amount of debt a student can carry and will force educators to find more creative ways to lower costs and help students pay tuition.
- Any student who had student loan debt that was first established from dates prior to the 1998 bankruptcy reform change, and who subsequently filed for bankruptcy relief, should be granted the right to reopen their bankruptcy and automatically have those student loans immediately discharged (without contest). They should also be entitled to have all their associated credit records associated with such loans redacted back to the point of their bankruptcy discharge date showing that date as the effective date of student loan discharge.
- Any student loan taken out between 1998 reform date and 2008 (same day and month of the reform date) should be immediately eligible for discharge under the new law. All other discharges should be in accordance with the new 5-year prohibition standard.
- All “undue hardship” bankruptcy cases should be automatically sealed from public records to protect student debtors and others in the process. Such information exceeds the need of the public and records and violates the Rights to privacy and opportunity for student debtors—no debtor should be condemned for life simply because they had a student loan and had to endure a Draconian adversary proceeding process to have the court review their need for an “undue hardship” discharge. Fresh start principles of Bankruptcy seek to give debtors a true fresh start and not otherwise hinder them with a variety of unintended outcrops that form in the new environment of the nation and realms of employment, renting, and other realities.
- See our other recommendations.